It is a seller’s market these days for homes across the top U.S. metro areas. Home prices have been rising – up 8% from 2017 – and homes are shifting fast as inventory and days on the market are down according to recent data by 8% and 7%, respectively. That said, home ownership for many remains a distant pipedream.
Consequently all this is putting pressure on prospective homebuyers to settle deals quickly before opportunities to purchase dry up. Fortunately for buyers all is not lost, even if they do not have the proverbial mom and dad lending them a big hand – aka the bank of mom and dad.
Across the Pond in Britain the picture facing potential home buyers in the big cities is much the same as in many leading U.S. cities. And, people renting in the capital, London, are paying out much more than they would if they could secure a mortgage.
Evidencing matters, rents in London rose at nearly three times the rate of wages in the six years to 2017 according to a recent study by the GMB union in Britain. The study found that the “average” rent for a 2-bedroom flat in London increased a not inconsiderable 26% to £1,500 (c.$1,956) over this period, while earnings rose 9% over the same time.
Warren Kenny, GMB’s London regional secretary, commenting in the wake of the findings published early this June, said: “These official figures show increases in average rents for 2-bedroom flats of 30% or higher in 16 of 33 London boroughs since 2011.” While Greenwich in the capital saw a 50% jump in rents, across England rents rose 18.2% to £650 (c.$848).
As a result some may never end up owning their first home simply because they are unable to save enough of a deposit to put down on a property – flat or house. And, unless the market crashes big time it is a situation that will continue to price first time buyers out.
Not helping matters are Chinese and other foreign buyers in parts of central London, many of whom do not even live in the properties they snap up. Surely time to think about a new set of properties tariffs to be introduced on such buyers.
A standard studio in a leafy suburb like Barnet up in North London around my neck of the woods would typically set one back around £230,000 (c.$300,000), with modest houses with 2-bedrooms going for anywhere between £450,000 (c.$587,000) and £500,000 (c.$652,000), depending on the location and condition.
Reflecting on the current state of play within the housing market, Tony Elia, founder and Director of independent real estate agency Mantlestates in East Barnet, London, which sells around 75 properties a year, said: “It is certainly far from easy for these first-time property buyers in London or elsewhere in other British cities, unless they have some significant savings built up and serious assets behind them. And, without it the most the vast majority of couples will be able to afford are flats.”
Just do the math and look at the numbers to getting on the property ladder and securing a mortgage on the basic studio flat in the British capital costing £230,000. An individual buyer earning an annual salary of £35,000 (c.$45,650) would probably secure a mortgage loan of four times that amount (£140,000/c.$182,600).
But then they would need to put down a deposit of £90,000 (c.$117,400) to make the transaction actually stack up and see it through to final completion. This also ignores fees for the solicitor, conveyancing, surveys, any mortgage application fee and stamp duty.
Key developments though, for example, in the financial and blockchain technology space are nevertheless changing the dynamics of lending and real estate markets.
Take aggregators like LendingTree, who help lenders and borrowers find the right match, while peer-to-peer (P2P) lending services such as the LendingClub enable buyers to crowdfund their purchases. New blockchain services are even figuring into loans for home purchases. Homelend, for instance, is using blockchain smart contracts and tokenization to facilitate – as the venture claims – enhanced P2P home mortgage funding.
These financing options are empowering prospective buyers to finally become homeowners despite the current market conditions. This, it is suggested by some parties, could only further drive the housing market boom.
Millennials & The Housing Market
The U.S. housing market has seen quite a recovery after crashing a decade ago. While the recovery was quite slow coming off the back of the recession, the market has steadily climbed higher since.
Over the past three years the market enjoyed decent year-on-year gains, although U.S. home sales did show a decline for a third straight month this June. However, a shortage of supply pushed up house prices to a record high, thereby sidelining a number of potential buyers.
Current market conditions in the U.S. of rising prices and a shrinking supply is clearly unfavorable for first-time buyers. This is bad news for Millennials (Generation Y) in particular, a group who are now supposed to be a key demographic for the real estate market.
They are now at ages – and typically born from the mid-1990s to early 2000s – where they are supposed to be laying down roots and establishing families. And, homeownership has long been considered a requisite to family life.
However, many millennials in the U.S. are saddled with student loan debt and most have not built strong enough credit scores and histories to readily qualify for mortgages from the usual channels. Indeed, personal debt in America – ranging from credit cards to auto and student loans – is slowly nearing on a 10-year high when looking back at the figures from 2008, according to statistics published recently by the Federal Bank of New York.
It has certainly been quite a difficult ride for many of this generation having also had to weather the tough jobs market brought about by the recession – not withstanding positive non-farm payrolls numbers in the U.S. of late. Not that that this group is incapable financially today, it is just that they do not meet the customary requirements of traditional lenders. Limited access to homeownership now comes as an added blow.
More Financing Options
It could be regarded that it is a good thing that more financing options are emerging for this demographic thanks to the fintech and crypto boom. Prospective buyers with good enough histories and scores could now maximize tech-driven tools like those offered by mortgage aggregators to help them shop for the best rates and terms for home mortgages.
Those who do not have the scores to secure loans from traditional lenders now have alternatives particularly in the form of P2P lenders. These platforms pool together money from interested investors and loan them out to borrowers.
They also have a much quicker turnaround compared to what customers might experience with banks and other large lenders. While these services started out only to fund smaller personal loans, some like LendingClub have grown and expanded to allow larger-value loans like mortgages to be made on the platform.
Blockchain-based lenders have built upon this crowdfunding concept and enhanced it with blockchain’s capabilities with smart contracts and tokenization. While initial efforts as espoused by the likes of SALT, which allows crypto holders to leverage their blockchain assets to secure cash loans, newer efforts are now more focused on using crypto to figure into a wider variety of financial products.
Elsewhere, upcoming blockchain lending platform Homelend, for example, is focused on providing mortgages to those disenfranchised by traditional lenders. The platform still uses a P2P arrangement to source funds for a mortgage.
However, it is claimed to make the process more secure through the use of smart contracts to ensure successful funding of mortgages and the proper payment of amortizations. Furthermore, smart contracts are used to guarantee the recovery of property in extreme cases of default and transactions are kept secure and immutable through blockchain.
Instead of relying solely on credit histories and scores, Homelend takes into consideration other factors such as a borrower’s education, work and even online activity when evaluating the person’s real creditworthiness. This becomes quite advantageous for many Millennials who may now actually be quite financially capable and stable, yet are hampered by their existing student loan balances.
Siim Õunap, an FX advisor and COO of blockchain and crypto marketing agency Savii Digital, commenting on the present landscape said: “As mortgages initiated the last financial crash, all of the largest institutional money lenders, such as banks, have tightened the knot in terms of lending for home and commercial mortgages. And, the exposure of hundreds of financial institutions in recent years regarding money laundering has tightened lending practices even further.”
The Estonian added: “In many cases, the list of requirements is so big now that even if one has a large enough income, deposit and assets, you can still be refused a loan to purchase the property. As a result, alternative methods of getting loans are becoming more popular and the lending terms that come with those options are getting even better.”
Õunap, who studied Technology and Management in Denmark at Aalborg University, further noted: “Blockchain powered platforms offer a level of security that normally is not there or sufficiently transparent enough. Blockchain, and smart contracts which are part of them, has created a perfect solution for the new wave of mortgages available for anyone, anywhere in the world, and opened up the housing market once again.”
Driving Growth
The emergence of these alternative financing options could provide an interesting twist to housing market in the near future. And, it is argued by some industry pundits that if these could transform Millennials into a legitimate market for home ownership then the current climate would surely see change.
Indeed, if it proved a significant enough of a sea change, the market could very well see demand for homes continue to rise. And, it is not just Millennials that are likely to be empowered by these new financing options. Those enterprising enough – such as home flippers – could even tap into these funding sources to bankroll their efforts.
Stakeholders could even be more optimistic since these options are not like predatory subprime mortgages that led to the last financial crash. These new options, particularly the blockchain-based ones, now use machine learning to evaluate creditworthiness objectively and not just prey upon those with impaired credit.
Moreover, since blockchain records are also transparent, peers and investors will be able to check and identify suspicious transactions if ever they become an issue.
Clearly, there are certain kinks that might have to be ironed out for all of this to fly. There are possible regulatory issues too that have to be settled especially when it comes to blockchain-based services. Fortunately, the growing acceptance of crypto hints that these might not be concerns for long. That said, we should not count our chickens.
What is even quite exciting given how P2P lending is designed, is that it is in everyone’s best interest for loans to be amply funded and that debts are properly paid back. This takes away concerns of a possible market crash caused by greedy moves made by centralized organizations. This time around, stakeholders in this booming housing market would do well to focus on achieving win-win outcomes. Carpe diem.